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WorksheetsCapital Budgeting
Total questions: 20
Worksheet time: 19mins
Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?
internal rate of return
net present value
payback
accounting rate of return
Which of the following is always true with regard to the net present value (NPV) approach?
The NPV and the IRR approaches will always rank projects in the same order
The NPV and Payback approaches will always rank projects in the same approaches
If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach
If a project is found to be acceptable under the NPV approach, it would also be acceptable under the payback approach
A set of projects in which the acceptance of one project means that the others cannot be accepted
Replacement Decision
Expansion Decision
Independent Projects
Mutually Exclusive Projects
The present value of an asset's future cash flows minus its purchase price initial investment is
Internal Rate of Return
Payback
Net Present Value
Modified Internal Rate of Return
This is a form of analysis defined by calculating how long it will take for the asset to "earn back" the money you invested in purchasing it.
internal rate of return
net present value
payback method analysis
tax accounting
This answers the question, "How much is my asset worth right now?"
net present value
internal rate of return
discount rate
capital budgeting
Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?
internal rate of return
net present value
payback
accounting rate of return
Which of the following statements regarding NPV is true?
If NPV is positive, the project is expected to earn more than the firm's cost of capital.
Accepting negative NPV projects will reduce shareholders' wealth.
If the NPV is positive, the project's cost is less than the project's expected benefit.
All of the above.
The following are the advantages of net present value, EXCEPT
it can be used as a rough screening device to eliminate those projects whose returns do not materialize until later years.
all positive NPVs will increase the value of the firm
it allows comparison of benefits and costs in a logical manner
it recognizes the timing of benefits resulting from the project
A significant advantage of the net present value is that it _______.
fully considers time value of money
takes into consideration the yield to maturity
uses profit in the analysis
none of the above
Which of the following statement about NPV is FALSE?
It does not allow for projects to be ranked.
It has an inadequate reinvestment assumption.
It is likely that there will be more than one NPV for a project.
All of the above
Which of the following statement regarding NPV is true?
An investment should be accepted if, and only if, the NPV equals the initial investment.
An investment should be accepted if, and only if, the NPV equals zero.
An investment should be accepted if the NPV is positive and rejected if it is negative
An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.
We compute the profitability index of a capital budgeting proposal by
multiplying the internal rate of return by the cost of capital.
dividing the present value of the annual after-tax cash flows by the cost of capital.
dividing the present value of the annual after-tax cash flows by the cash investment in the project.
multiplying the cash inflow by the internal rate of return.
An independent project should be accepted if it
produces a net present value that is greater than or equal to zero.
produces a net present value that is greater than the equivalent IRR.
has only one sign reversal.
produces a profitability index greater than or equal to zero.
A significant disadvantage of the internal rate of return is that it
does not fully consider the time value of money.
does not give proper weight to all cash flows.
can result in multiple rates of return (more than one IRR).
is expressed as a percentage.
Under what condition would you NOT accept a project that has a positive net present value?
If the project has a profitability index less than zero.
If two or more projects are mutually inclusive.
If the firm is limited in the capital it has available (capital rationing).
If a project has more than one sign reversal.
If PI of the Project A is 1.2 ; Project B is 1.1 ; Project C is 1.4 and Project D is 1.8 then Rank will be as ______
A,C,B,D
D,C,A,B
C,D,B,A
B,D,C,A
If PVCIF is Rp 850.000 and PVCOF is Rp. 450.000 then NPV is ______
Rp. 400.000
Rp. 40.000
Rp. 40.000.000
Rp. 130.000
___________ is the planning process used to determine whether an organization long term investments
Capital Rationing
Capital Budgeting
Cost of Capital
Leverage
When using the Net present value capital budgeting technique for a company with debt & equity finance, which is the most appropriate discount rate to use?
Cost of equity
Market interest rate for debt
Prime interest rate
Weighted average cost of capital
